Galbraith: The Danger Posed by the Deficit 'is zero'

Sorry to rock your world S&L.
Your "shilling" (2 can play that game) for Fox news and Republlcan policy has demonstrated a blind adherence to an ideology that put us in this mess, so maybe its time to listen to someone else.

Galbraith: The danger posed by the deficit ‘is zero’

James Galbraith is an economist and the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin. He's also a skeptic of the prevailing concern over America's long-term deficit. With many people now comparing America's fiscal condition to Greece, I spoke with Galbraith to get the other side of the argument. An edited transcript of our conversation follows.

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.

EK: Then why are the bulk of your colleagues so worried about this?

JG: Let's push a bit deeper on the CBO forecasts. They publish a baseline set of projections. One of those projections holds the economy will return to a normal high-employment level with low inflation over the next 10 years. If true, that would be wonderful news. Go down a few lines and they also have the short-term interest rate going up to 5 percent. It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts. And those forecasts are driven partially by the assumption that health-care costs will rise forever at a faster rate than everything else and by interest payments on the debt will hit 20 or 25 percent of GDP.

At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation. And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have. These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story. So everything that is said that is based on the CBO's baseline is, strictly speaking, nonsense.

EK: But couldn't there be a space between the CBO being totally correct and the debt not being a problem? It seems certain, for instance, that health-care costs will continue to rise faster than other sectors of the economy.

JG: No, it's not reasonable. Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.

EK: But putting inflation aside, the gap between spending and revenues won't have other ill effects?

JG: Is there any terrible consequence because we haven't prefunded the defense budget? No. There's only one budget and one borrowing authority and all that matters is what that authority pays. Say I'm the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.

What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.

EK: What are the policy implications of this view?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.

EK: That does it for my questions, I think.

JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.

The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes.

On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.

Do you have any intuition at all? You certainly don't beleive "it's for free", do you? I don't know your background, but Newton figured out a long time ago that for every action there is a reaction. We also know energy in = energy out.

I have excellent intuition thank you. I started purchasing SXM stock under 10 cents.

I hope you truly read his interview. Do you disagree with what he says in his last answer?
Show me where he is wrong with regard to specific statements he makes. Galbraith is a VERY reasonable and intelligent economist. I listened to him last night on the radio. i suggest you listen to him sometime as well and switch off Fox business news for a change. What he says makes sense to me. Its always hard to stand up to the prevailing "wisdom".

I have excellent intuition thank you. I started purchasing SXM stock under 10 cents.

I hope you truly read his interview. Do you disagree with what he says in his last answer?
Show me where he is wrong with regard to specific statements he makes. Galbraith is a VERY reasonable and intelligent economist. I listened to him last night on the radio. i suggest you listen to him sometime as well and switch off Fox business news for a change. What he says makes sense to me. Its always hard to stand up to the prevailing "wisdom".

P.S. Fan blogs? Thats really funny.

Schiff, a very reasonable and intellegent economist himself, seems to prefer video's. I don't care where the video's are located, but note that they aren't located on Fox News.

I truly hope you watched his video's, and can tell me where he is wrong with specific statements he makes.

It is counter intuitive to believe that it is ok to run huge, unmanagable debts.

By the way, who is this guy?

James K. Galbraith (born January 29, 1952) is an American economist who writes frequently for mainstream and liberal publications on economic topics. He is currently a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. He is also a Senior Scholar with the Levy Economics Institute of Bard College.

I asked you specifically address Galbraith's last answer and to point up anything that he says that you can show to be false. Still waiting.

Instead of trying to denigrate Galbraith because he writes for mainstream and liberal publications (i quess that makes someone illegitimate huh? lol) why dont you just address the facts. He is a very mainstream, reasonable and well respected economist.

Can you name the diverse group of economists you follow? lmfao.
Oh and you left out that i quote from Warren Buffett, Paul Volcker and Martin Feldstein.
ooohhhh they are so scary.

in a 2002 interview with Southland Today, Schiff predicted that the economic downturn triggered by the bursting of the stock market bubble would lead to a bear market likely to last 'another 5 to 10 years.' in nov. 2002, US stocks began a bull market uptrend which held steady for at least 5 years, until reversing course in 2008, when The Dow, Nasdaq and S&P began a decline to less than half of their peak 2008 values, followed in 2009 by the Dow climbing 61% from its low point over the followinig year. After interviewing Schiff in 2009, journalist and finance author Eric Tyson, referenced various Schiff predictions during the 2000's and stated that 'ON ALL OF THESE COUNTS, SCHIFF WASNT JUST WRONG BUT ENDED U P BEING HUGELY WRONG.'
Schiff later released a video stating that 'when i gave that interview in 2002, i had no way of knowing how irresponsible the Fed was going to be... But i recognized that early: back in 2003 and 2004 i changed my forecast...'

Since 2007, Schiff has stated many times that if the government doesnt change course there will be hyperinflation in the U.S.

I was just wondering how many years can he keep saying that? What year is he prediciting this to happen?

"... As early as 2009 Schiff was receiving criticism due to the performance of some of his client's accounts in 2008, as well as controversies over the predictions themselves. In Jan. 2009, economic blogger and investment adivser Michael Shedlock reported, " i have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008."

Obviously there are 2 sides to this investment stories, but its good to hear another side from the one you post here about Schiff. There is more interesting stuff on wikidpedia and elsewhere about Schiff.

I was wondering S&L if you invested with Schiff?
I will also point out that Galbraith is NOT an investment advisor like Schiff
nor his he trying to be a politician as Schiff is. Schiff is running for the Senate. lol.
Galbraith will never be accused of conflicts of interest.

He said something about predicting Depression here in 2012. Is that definitely his prediction?
When is this inflationary depression coming that he is quoting.
I heard Schiff almost slip in his quote about the size of the bush deficit. He stops himself and didnt finish the amount. He was about to quote a WAY low figure. Also doesnt point
out that the "Obama deficit" is made up to a large degree of the Bush deficit. Interesting.

No, I haven't invested with Schiff. I can screw up my own portfolio. I hadn't believed his gold hype, and sold FSAGX and DBP for a modest profit. In retrospect, had I held, I'd be up 20 to 30% now. I also have a hard time agreeing to the inevitabilty of hyperinflation.

I'm not trying to denigrate Galbraith, only pointing out that it is noted that he writes for liberal media. It's called considering the source which has proved to be an valuable suggestion from your like minded friend.

Keep waiting. I cannot remotely begin to discuss the assertion that deficit's are good. At $45,000 per US man, woman or child, I find it hard to believe. Did you listen to Schiff? How are we going to pay it back? That's right, we can't. We will borrow more. It is indeed a Ponzi scheme.

No, I haven't invested with Schiff. I can screw up my own portfolio. I hadn't believed his gold hype, and sold FSAGX and DBP for a modest profit. In retrospect, had I held, I'd be up 20 to 30% now. I also have a hard time agreeing to the inevitabilty of hyperinflation.

I'm not trying to denigrate Galbraith, only pointing out that it is noted that he writes for liberal media. It's called considering the source which has proved to be an valuable suggestion from your like minded friend.

Keep waiting. I cannot remotely begin to discuss the assertion that deficit's are good. At $45,000 per US man, woman or child, I find it hard to believe. Did you listen to Schiff? How are we going to pay it back? That's right, we can't. We will borrow more. It is indeed a Ponzi scheme.

I am not favorably disposed to Schiff when i listened to him. He seems to make a lot of extreme predictions. Can you say snake oil salesman?
He is just another investment advisor trying to make a name for himself
with dramatic assertions and predictions. I will be very curious to see where he goes with all this. On top of that he now wants to be a US senator. That must have really made you laugh.

So you will not address anything specific that Galbraith says. Interesting.
I notice you say that Galbraith writes in "liberal media". Your original quote
said "mainstream and liberal". just trying to be a bit more accurate.
Either way if you listened to him you would understand why no one would ever accuse him of being a snake oil salesman. Very reasonable.

P.S. Surprised you dont invest with him since you seem to hold him in extremely high regard.
You read his books and quote from him. Hmmm.